CAGRs are Okay! Who will handle the Drawdowns?

 Long back, we had written a blog about how mutual fund works and highlighted that a certain fund had made a return of 29% and uncannily poked greed of our readers by telling that the fund multiplied their money 49 times in just over 2 decades meaning 1 lac would could have become 49 lacs in 20 years. Here's the snippet from that blog -   

There is no doubt that the Fund has made such wonderfully high returns. But what we did not drive people's attention to, made us write this blog. A 29% CAGR is Okay! But who will handle the Drawdowns?

Before anything, let us tell you what a Drawdown is? It is just a fancy word for the fall in one's Investment value. On its way to making 49 lacs out of 1 lac, the Fund's value had fallen multiple times as shown below 

We can see that there have been multiple times when the total loss from peak was more 10 lacs. But today, the total value of investment is still more than 62 lacs. The important lesson to note here is when you choose to invest in equity or equity related products, you will make good returns but the returns will come with volatility which will cause you to panic. You should handle these fall induced panic attacks properly to prosper in your financial life. On the other side, not all the losses climb back and become profits. So here's what the Investors should do if they wish to handle these drawdowns in the best possible way - 

1. Do all the investments based on certain objectives. Once the objective is full filled, get out. 
2. When in doubt speak to a good advisor and sort out an action plan. 
3. If you are really stressed out by the drawdowns, do not react in panic. Just do nothing. "This too will pass" 

For financial planning and investment-related queries, write to us at dropletadvisory@gmail.com or call us at 9962399924 / 9551373455. Visit our website - www.dropletwealth.com